By The Hard Assets Alliance Team
Gold is back.
Last September, after drifting around $1,600 an ounce for eleven straight months , gold rose above its 200-day moving average and into an official uptrend. Today, that trend is still intact and the next phase of the gold bull market is underway.
The question now is whether this is a fleeting summer fling – or the start of the next phase in our sector?
We think this is just the beginning for gold and silver. We may see some consolidation or even a pullback due to potential seasonal weakness, or some “price fatigue” after such a big advance, but our bullishness has little to do with seasonality or short-term price surges.
Here's what supports our outlook:
Source: Hoisington Investment Management Company
This data has rendered us numb to incomprehensibly large numbers – yet US debt and liabilities continue to grow unabated. In Q2 2012 alone, for every $1 added to GDP, we added more than $2 in debt. This is a fundamental reason we remain convinced the US can't grow its way out of its financial hole.
Historical precedent also supports our conviction. Since 1800, a study of 26 countries with debt overhangs that lasted five or more years showed that the subsequent drag on the economy – below average or negative growth – lasted 23 years on average. A “debt overhang” is defined as a period where public debt-to-GDP exceeds 90% – the US is way beyond that. There simply won't be sufficient revenue generated for the debt and promises to be paid in anything near the purchasing power of today's US dollar.
Uncle Sam's Magic Elixir
The upshot is an unsustainable, and rising, federal debt level made worse by the Federal Reserve, which continues to expand its balance sheet and blow more air into the bond bubble. Last month's announcement of open-ended QE3 – QEternity – is the government's response to this obscene blunder.
And it's not just the US; the Fed's announcement followed European Central Bank (ECB) President Mario Draghi's disclosure that he would buy unlimited quantities of European sovereign debt. Not to be outdone, Japan's central bank then declared it will expand its current purchase program by around 10 trillion yen ($126 billion) to 80 trillion yen.
This runaway debt and money printing shows no sign of slowing, let alone ending. We therefore remain very bullish on our sector. The consensus opinion at Hard Assets Alliance is that there will be major consequences for currencies, the precious metals market, and us personally.
Here's what we believe awaits us in the next phase…
Higher inflation is virtually ensured. There is no magical way to escape it now, nor any politically acceptable way to avoid it. Amidst the competing forces of inflation and deflation, inflation is encouraged until it wins, as any deflation episode inspires further money printing. As the fallout gathers steam, paper money will lose purchasing power faster and faster.
Gold and silver prices are headed much higher. Expect corrections along the way, of course, but politicians are pursuing fiscal and monetary actions that remain highly supportive of the precious metals market. In our view, the odds of this ending in a mania have ratcheted up.
Physical metal is about protection more than profit. Buying bullion is less about making money and more about preserving your standard of living. Think of gold as lifestyle insurance. Gold and silver won't solve every future problem, but you're going to need them.
Holding a meaningful cache of bullion is imperative and now, there's a simple and secure way for investors to do just that, through the Hard Assets Alliance.
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